Sunday, July 12, 2009

Getting Close to a Short Term Low in Terms of Time

Top Line: Stock prices could potentially be putting in their lows in the next several trading days, let's say about ten days.

We received a question in last week's comment section which we have not answered. We thought it deserves a couple of paragraphs in tonight's post.

The question is, "What should we do if the SP500 drops below 850?"

The first answer is that we Expect the SP500 to drop below 850 and that's where we want to do our buying. The question is more like what if the SP500 drops to, say, 750, which of course it could but we think that is for the "next" time down. That seems like a long ways to go but we can't say that it can't because the market is always capable of multiple personalities.

The amateur chartists are telling us that the SP500 has just experienced a head and shoulders top which should lead to a "measured move" down to about 800. Right now, we are trading near the neckline around 880 and a good break of that should, in these technicians minds at least, produce a sharp move down to just under 800.

What this thinking causes them to do is to short stocks right after the market makes a solid move below 880 or maybe 870. This selling could lead to a quick drop just below 850 but we don't think these new chartists will be able to capitalize on the "great" short idea because the market will not accommodate their analysis. When too many expect something, it is likely Not to happen.

Should you "hold off" until we get down to another support level? We would say that anything under the SP500 850 level should represent good buying opportunities. If a drop like that is accompanied by a surge in the volatility indexes, say VXO goes to 38 or 42, then we would say it is a great time to buy.

Here's what we expect will happen over the next two to three weeks. We have been well served by Elliott wave in the past and now we think it appropriate to go back to that model. We assume that the market will put in a bottom in the next three weeks and it will go something like a reverse head and shoulders with a sharp move down with a rally following. Then another sharp plunge to a new low and then a rally. This would be followed by another drop to a low similar to the first low.

In Elliott wave terms we are probably coming into a third wave low which will lead to a fourth wave bounce and then a fifth wave low, The low for the move. This would then be followed by a strong rally which would be a wave one up which would be followed by a wave two back down. From there we would expect you had better be in or you will miss the biggest rally in the shortest period of your life.

We will guess that the third wave would spike down below 850 and then the fourth would rally back above 850 but stay below 875 and then fall in a fifth wave to about 835 or so. Then we will have a rally back to about 880 or maybe 900 indicating that maybe something different is going on to those savvy few. This spike needs to be sold and we expect it to be sold down just about to 850 but maybe not.

The way to trade this is to simply figure out What you want to buy and how much you want to buy and then of course picking your prices. With the potential of three good buying opportunities coming up, we should be taking full advantage of them. For the stocks you want to buy, it seems likely that they will put in their bottoms in or near one of those three lows. You won't know which until after the fact. That means you have to take a shot at buying for the right price by being bold and entering orders that are GTC (good till canceled).

We have a difficult time doing that because we always think we can get better prices than just guessing in the evening when you are putting in your orders. We do think if you are buying a stock, you should only pick up part of your position on the first decline and more on the second decline and maybe more on the third, if they all develop.

As we view the overnight markets, they are mostly down including the US futures. The Japanese have just announced that deflation is still going on there, wholesale prices dropped 6.6% in June. There are other news items out of Japan and other Asian countries, perceived as bad for the stock market. Here in the US, the second quarter earnings are starting to be released which is giving some pause for concern. We think that will be part of the driver for low prices coming up but that after a while the market will begin to look past them to brighter days ahead.

We think it is time to start getting ready for a great buying opportunity for stocks. This could be the last good time to buy until after we go down next year. And, we think it is essential to financial success to be long coming out of these July lows.